Firstly I would like to appreciate the views and compliments. I was
mentioning to Mr Idrees Khawaja that perhaps they could have chosen a
much better representative for the private sector because my view is
distinctly in the minority in case of RGST. I will just share with you
where the private sector stands on the issue of RGST, what their opinion
is and then I will give you my own stance on the subject as well as
justification on the same. As you would know from newspapers and other
media, the private sector is strongly against the imposition of RGST.
The vast majority of chambers, which represent the bulk of
Pakistan's private sector, have been vociferous in the opposition
of RGST. I must mention here that in addition to my responsibilities at
Engro, I also serve in the role of Chairman of Pakistan Business
Council, which was created a few years ago. Pakistan Business Council
comprises of largest business groups of Pakistan. Every single large
business group of Pakistan is its member, including some of the key
multinationals operating in Pakistan. Pakistan Business Council formally
supported the RGST, even during its hearing in the National Assembly
Finance Committee. Part of the difference that you see here can be
explained in terms which would be flattering to us. We have been part of
the industry since a very long time but we realise where the world is
headed, and understand that a modern country cannot progress and cannot
be run effectively with a tax-to-GDP ratio which is in single digit. But
since the private sector is not significantly represented here, I think
it is only fair that I try to bring forth where some of their
apprehensions come from. We at large businesses have management systems
and teams who are sophisticated enough to deal with complex systems. We
have the necessary resources which enable us to engage the most
expensive lawyers in Pakistan, and fight with the FBR when we see
corruption or unfair practices being carried out. We can also raise
issues that we face in front of the highest authority in the country.
The vast majority of the Pakistani businessmen are small traders or
small manufacturers. They do not have the systems and resources like
large companies. Moreover, fact of the matter is that the tax machinery
in Pakistan is both incompetent and corrupt. Therefore, it is a very
legitimate concern on part of the business community that the RGST will
make their lives difficult, more than the way economic theory portrays
it to be. This is because there are certain realities that have to be
looked at.

Having given you our position that we support RGST implementation
let me share with you some of the concerns that we have. The first is
the threshold level of Rs 7.5 million that has been taxed. Any threshold
will have this problem but the more you raise the threshold the bigger
the problem becomes. I am surprised that this question was not raised in
the hearing which took place (and by coincidence, it is the same
question which my driver asked me). He asked how RGST would be any
different from the current system. Upon explaining the concept to him,
he surprised me by asking how would one determine who has a turn-over of
Rs 7.5 Million. I have yet to get an answer on this question from
someone. If this sector is totally undocumented, then who is going to
make the call that this shop is above that threshold and this shop is
not. Are we not opening the door to a massive rent seeking opportunity?
I think this is an aspect that we have not paid any attention to, and
demands serious consideration. One of the biggest oppositions against
the RGST is the issue of inflation. Most people do not realise that
today the GST is imposed on the vast majority of products except for
those which are zero-rated or exempted. The manufacturer collecting the
GST does so at the retail price. So even though the intermediary
participants of the chain are not documented but tax is being collected
effectively on the entire value added. When you go through a different
system where you are now trying to recover at each stage, it is quite
expected that collection from manufacturers is going to fall. Now you
are moving into a much more difficult terrain. You are trying to collect
from the undocumented sector. So the chain will break and indeed is
going to break in many instances. As a result collection is going to be
far below the set target. The third element, which is a big issue under
any circumstance in the current macroeconomic environment, is that of
liquidity. Liquidity problems will be created when you take away the
zero rating. That is the reality and once again I am very surprised that
very little has been done to address the apprehensions of the business
community in this particular aspect. Even the most successful businesses
are expecting problems because it is a given reality. If you look at our
balance sheets right now you will see that the government of Pakistan is
using refunds as a float to finance its funding requirements. The
numbers have continued to float over the last few years and it has
become bigger and bigger with time. Whether it is being done
deliberately or is just due to absence of a sophisticated mechanism or
perhaps due to weak systems, in any case it is a reality. Moreover as a
result of monetisation of fiscal deficit and resultant crowding out
effect, inflation has gone up, discount rates have had to follow the
same direction with interest rates rising more and more. It has become
quite a significant issue for businesses and it is not just the interest
rates but also liquidity which is an issue for the small
trader/businessman. If you look at the State Bank data on the amounts
outstanding as credit to the private sector, you will see a continuous
decline in numbers for the last three years. Therefore, they do not have
ample liquidity, or the capacity to pay for the very expensive credit
even if they can get their hands on it. Therefore, I truly believe we
are setting ourselves for a difficult transition and by this I am not in
any way implying that we shouldn't do it. We have to do it--that
road has to be travelled, and we have to start the movement in that
direction but I truly believe that we could have done much better
homework in preparing for this transition and its implementation as well
as in dealing with both the perceptual and the real issues which are
going to be faced as a result of this.

The last thing I will say is that even those of us who support the
RGST have a very strong feeling that the tax structure in Pakistan is
completely and totally inequitable. The low tax-to-GDP ratio is just one
issue--the inequity of that tax system is another major issue. When I
used to be a director at Karachi Stock Market I ran at crusade literally
arguing for capital gains tax on stock market at that time. I used to
give the example of my accounts clerk who resided in Orangi, and changed
two mini buses to get to office, paid tax on his income and there were
many days in a year when in a single day had more capital gains--I, Asad
Umar, had more capital gains than that poor clerk had in his entire
year's earning, and I paid no tax on capital gains. That is just
criminal.

I am glad to see we have moved in that direction but there are many
other taboos which have been left outstanding. I will just mention two
of them. One of them is Agriculture Tax. Everybody talks about it but
again the question is of fairness. There is an incorrect impression
which has been created that while agricultural tax must be imposed
because it is the right thing to do, even those who support imposition
of agricultural tax say that the actual collection is going to be a very
insignificant amount. That is just patently wrong, and people who make
that assertion have not seen what has happened to the commodity markets
in the recent years. The earnings of the agricultural sector have gone
up. Doing my calculations I have not finalised it, I will not take a
number but it is many manifold more than the estimates that I had
before. The other thing which I have to mention mainly because I come
from three generations of Army Family (Fauji Khandan) is about a
particular tax that was passed, specifying that if an employer gives an
asset to an employee at a price below the market value the differential
has to be taxed. I would want to hear from the FBR as to how much tax
has been collected from all the land which have been distributed to many
generals in previous years.

Once again I must say that I am not implying in any way that the
RGST should not be implemented; it should be implemented but one must
know that it is only an essential but insufficient condition for tax
reforms in Pakistan.